Perpetual Futures Explained

A perpetual future, or perp, is the most traded instrument in crypto. More bitcoin changes hands through perps than through spot markets, which is why the desk reads perp data every morning before it decides anything. This lesson covers how perps, leverage and liquidation work and why perp data shows how other traders are positioned.

What a perp is

A perp is a contract that tracks the price of a coin without you owning the coin. If you go long a BTC perp and bitcoin rises, you make money. If you go short and bitcoin falls, you make money. Going short is as easy as going long, which is one reason perps are so popular.

A traditional futures contract has an expiry date. On that date it settles, and its price has to meet the spot price. A perp never expires. Instead, a payment called funding changes hands between longs and shorts every few hours. When the perp trades above spot, longs pay shorts; when it trades below, shorts pay longs. That payment keeps the perp anchored to spot without an expiry date.

Most crypto perps are margined in a stablecoin such as USDT. You put up stablecoins as collateral and your profit and loss is paid in the same stablecoin. The contracts the desk reads, and the ones its calls are graded against, are Binance USDT perpetuals.

Leverage and margin

A perp lets you control a position bigger than the money you put up. The money you put up is your margin. The ratio between the position and the margin is your leverage.

Say you put up 1,000 dollars and open a 5,000 dollar long. That is 5x leverage. A 10% rise makes you 500 dollars, half your margin. A 10% fall costs you 500 dollars, also half your margin. Leverage does not improve your odds; it only changes what each move costs or pays.

Exchanges also set a maintenance margin: the minimum collateral a position must keep. Fall below it and the exchange closes the position for you. That forced close is a liquidation.

Mark price and liquidation

Exchanges do not liquidate on the last traded price alone. They use a mark price, built from an index of spot prices across several exchanges plus a smoothed premium. This stops a single thin trade from wiping out positions.

In the 5x example above, your liquidation price sits somewhere short of a 20% fall, because the exchange closes you before your margin reaches zero. At 20x leverage the same maths puts liquidation a little under 5% away, a distance an ordinary day in crypto can cover. High leverage does not need a dramatic move to end a trade.

Liquidations matter beyond the trader who suffers one. A liquidated long is a forced market sell. When many longs sit at similar levels, one wave of liquidations can push price into the next wave. The lesson on crowded trades covers how those cascades build.

Basis: the gap between perp and spot

The difference between the perp price and the spot index is called the basis, or the premium when the perp is higher. A perp trading above spot tells you buyers are willing to pay extra to be long with leverage. A perp trading below spot tells you the short side is in demand. Funding exists to close that gap, so funding and basis tell the same story from two angles.

Why perp data is so useful

Spot markets show you price. Perp markets also show you positioning, because every perp position is recorded by the exchange:

• Funding shows which side is paying to hold its position, and how much.
• Open interest shows how many positions are open, and whether new money is arriving or leaving.
• Long/short ratios show how accounts on an exchange are split between the two sides.

Read together, these numbers tell you whether a move is being driven by fresh conviction, by traders closing out or by a crowd that is paying more and more to stay in. The desk does not trade on any one of them alone; it uses them to judge whether a chart setup is worth taking or whether it is walking into a crowd.

The costs people forget

Perps charge trading fees on entry and exit, and funding is charged on the whole position, not on your margin. A position held for weeks while paying high funding can lose money even if price ends where it started. That is why the desk measures results in R and plans its stop and target before entry: the cost of being wrong is fixed in advance. How calls are graded is set out on the record page.

Key takeaways

• A perp tracks a coin's price with no expiry; funding payments keep it close to spot.
• Leverage magnifies gains and losses equally, and liquidation closes you before your margin hits zero.
• Exchanges liquidate on the mark price, an index across several venues, not on one stray trade.
• Perp data shows positioning as well as price, which is why the desk reads it every morning.